Last Week in Event SPACE - Astellas, Celltrion, Renesas, AWE, Viva, Kushikatsu

Last week, Astellas Pharma Inc (4503 JP)'s latest buyback may impact the stock; KOSDAQ 150 names expected to benefit as Celltrion Inc (068270 KS) exits; is a Maxim Integrated Products (MXIM US) tie-in optimal to boost Renesas Electronics Corp (6723 JP)'s analog assets?; AWE Ltd (AWE AU) trades through terms as Mitsui & Co Ltd (8031 JP) trumps Mineral Resources Ltd (MIN AU)'s offer; a speculated Viva Industrial Trust (VIT SP) / ESR-REIT (EREIT SP) merger is closer to reality; and Kushikatsu Tanaka Co (3547 JP) may be entering a small air pocket to the upside.

Buybacks

Astellas Pharma Inc (4503 JP)(Mkt Cap: $28.2bn; Liquidity: $90mn)

Astella announced a buyback program to repurchase up to 42mn shares for up to ¥60bn between February 1st and March 23rd 2018, which is a considerably larger buyback than the last dozen or so in terms of buying volume as a percentage of average eligible volume.

• Although just 2.08% of shares outstanding, factoring in the share buyback guidelines (including no purchase orders should be made in the final 30 minutes of trading), Travis Lundy estimates this buyback could account for 28.5% of normal eligible volume. That could have an impact on the stock over the next two months.

(link to Travis’ insight: Astellas (4503 JP) Buyback - How It Stacks Up Against Past Buybacks)

Index Moves

Celltrion Inc (068270 KS) (Mkt Cap: $34.3bn; Liquidity: $477mn)

At a press conference on the Jan 29, a KRX official said he was confident that Celltrion's KOSPI move would be completed by Mar 8, the nearest double-witching day. With the market initially expecting June, Celltrion popped 6.8% on the day and as of Friday, up 2.5% since the news.

• Celltrion will be the KOSPI 200's third largest member, sandwiched between SK Hynix Inc (000660 KS) and POSCO (005490 KS). This will involve considerable outflow for existing KOSPI members - an estimated ₩258.8bn (a little under 1% of market cap) worth of passive fund outflow for Samsung Electronics Co Ltd (005930 KS), as an example.
• Sanghyun Park estimates a net inflow of ₩0.55tn for Celltrion’s Kospi 200 addition. However, Celltrion’s current stock price movement is being affected by various ‘complex’ factors, making it challenging to accurately gauge the quantitative impact of this ₩0.55tn.
• Celltrion is by far the KOSDAQ's biggest member with an index market cap weight at 26.10%. A better direction is to focus on the names in the KOSDAQ 150 which will benefit from Celltrion’s departure, preferably those which take longer days for passive funds to cover this change caused by Celltrion’s exit. A selection of names include Gs Home Shopping Inc (028150 KS), Leeno Industrial Inc (058470 KS), Silicon Works Co Ltd (108320 KS), Modetour Network Inc (080160 KS), Jenax Inc (065620 KS), amongst others.

(link to Sanghyun’s insight: Impact Analysis of Celltrion’s KOSPI Move on KOSPI 200 and KOSDAQ 150)

Stock Splits

Samsung Electronics Co Ltd (005930 KS) (Mkt Cap: $286bn; Liquidity: $623mn)

Samsung shareholders will vote on Mar 23 on the 50:1 stock split. SamE shares will then be suspended from trading from Apr 25 to May 15, and re-listed on May 16. SamE finished roughly flat on the day of the announcement after foreign selling pushed down the intra-day gain of 8.7%, and as of Friday, is down 7% since the announcement.

• Though not an apple to apple comparison, Sanghyun looked to Amorepacific Corp (090430 KS)'s 2015 10:1 stock split as guidance to SamE possible performance surrounding its split.
• Amorepacific shares eked out a 45.49% gain from its share-split announcement to the resumption of trading. Even taking into account Amorepacific was benefiting from a booming China at the time, it was apparent the split was a very specific catalyst.
• Of interest, the final verdict of Lee's appeal trial will come out tomorrow (Feb 5).

(link to Sanghyun’s insight: Samsung Electronics Stock Split Event Assessment)

Value

Japan Tobacco Inc (2914 JP) (Mkt Cap: $65.8bn; Liquidity: $159mn)

Since hitting its 52-week high on May 24 last year, Japan Tobacco (JT) has been one of the worst performing large-cap stocks in Japan (-14% versus the Topix index's rise of +17%) and the worst tobacco stock in the world. This is mainly due to rivals like Philip Morris International (PM US) and British American Tobacco PLC (BATS LN) beating JT to the "heat-not-burn" (HNB) cigarette market in Japan. The domestic tobacco market accounts for ~40% of JT’s OP.

• JT is rolling out its own HNB product "Ploom Tech. The question is whether to buy before the release of its 9M18 results on Feb 6^th in anticipation of an earnings surprise via Ploom? SC Capital wouldn’t rush in. JT's typically conservative guidance numbers should be taken at face value, while data numbers are expected to be thin on the ground for Ploom to ascertain its profitability.

(link to SC Capital’s insight: Japan Tobacco (2914)--The Most Awaited 2018 Guidance in Japan)

Rights Offerings

Samsung Heavy Industries (010140 KS) (Mkt Cap: $3.4bn; Liquidity: $54.4mn)

Two months after first announcing a rights offering, Heavy finally unveiled it will involve 240,000,000 common shares with a tentative offering price set at ₩6,510. Heavy will raise a total of ₩1,562.4bn, which gives a capital increase rate of 61.52% and a share dilution of 38.09%.

• Sanghyun suggests waiting until the subscription period kicks in such that you have enough price spread versus the share price. If so, then buy as many subscription rights as you can and either short Heavy shares or take short positions on Heavy futures contract ending the earliest date.
• At the last traded price, the return on investment – assessed on the estimated subscription price – will be about 1-3%. A comprehensive rundown of the calcs for this return, subscription and final offer pricing, can be found in Sanghyun’s insight.

(link to Sanghyun’s insight: Samsung Heavy Rights Offering - Details & Subscription Right Price Estimations)

Renesas Electronics Corp (6723 JP)(Mkt Cap: $19.6bn; Liquidity: $52.8mn)

On Jan 30, the FT reported that Renesas could bid up to US$20bn to purchase Maxim Integrated Products (MXIM US). It is expensive at 35x (and above the 28x Renesas paid for Intersil), but Mio Kato, CFA would argue that these assets cannot be bought cheaply, are vital for future strategic success and WILL be acquired by some player. Mio previously flagged Maxim as a potential candidate for Renesas to beef up its analog assets, which will be a vital plank in its ADAS/AD and IoT/Automated Factory strategy.

• The deal size however, is a concern. Mio previously backed out a war chest for Renesas of US$7.9bn - the US$20bn headline price exceeds this by a wide margin. This will require a significant capital raise, which may be difficult given the relative size. Or potentially a share swap approach.

• With Renasas already carrying a significant depreciation burden due to the Intersil acquisition and market absorption of additional equity due to the sale of the INCJ's stake previously, the market's short-term reaction to a deal of this size could be quite negative.

• Mio would not feel comfortable recommending a short as there are currently too many unknowns, but he would step away here and wait for further details on potential acquisitions. This is a very detailed piece and Mio discusses a number of alternative M&A targets, including On Semiconductor Corp (ON US).

(link to Mio’s insight: Would a Maxim Acquisition Be Digestable?)

AWE Ltd (AWE AU) (Mkt Cap: $492mn; Liquidity: $4.7mn)

Morningstar and Pranav Rao discussed Mitsui & Co Ltd (8031 JP)non-binding, conditional proposal for AWE Ltd (AWE AU) at A$0.95/share (cash), trumping Mineral Resources Ltd (MIN AU; "MinRes") revised implied scrip/cash offer of A$0.83. The offer is also free from due diligence, financing, and regulatory approvals, but is conditional upon AWE terminating the MinRes scheme and 50.1% acceptances from AWE shareholders

• While this offer looks pretty good, AWE is trading through terms ($0.985 at the close on Friday) awaiting MinRes potentially re-loading; while there might be other contenders such as Beach Energy Ltd (BPT AU) and CERCG. Pranav would be long at A$0.96-0.97.

• Note: on Friday submitted an application with the Australian Government Takeover Panel, saying that CERCG's bid fails to address an offer by MinRes and that funding is not sufficiently disclosed.

Links to:
Pranav’s insight: AWE: The More, The Merrier
Morningstar’s insight: Sirtex Takeover Bid at a Significant Premium to Standalone FVE

Sirtex Medical Ltd (SRX AU) (Mkt Cap: $1.3bn; Liquidity: $10.5mn)

Both Morningstar and I covered Varian Medical Systems Inc (VAR US)'s takeover proposal for Sirtex Medical Ltd (SRX AU) at A$28/share, which is priced to complete given the significant premium (49% to the undisturbed price) and compares to Morningstar’s fair value of $15.50.

• The offer is pitched around the December 2016 price levels, prior to Sirtex announcing reduced sales guidance. A week later, the company announced an investigation into the CEO's trading activities. Shares have not broken $19 since and have traded as low as $10.45 in the past year. Pricing is above nearest peer, BTG PLC (BTG LN), which offers a similar, competitive treatment, trades at a forward EV/EBITDA of 15.7x vs. 18.6x under the offer.

• Sirtex is effectively a single-product company, with follow up trials on other treatments falling short of expectations or failing to exhibit any statistical improvement. The upbeat trading update released on the January 17, 2018, indicates the improvement in the bottom line was driven by superior cost management, not a turnaround in demand.

• Trading tight to terms (1.8%) which is reasonable. A competing bid cannot be ruled out. The largest shareholder, Consonance, which bought in at ~$16/share, sold around 40% of its holding on Wednesday and ceased to be a substantial shareholder.

Links to:
Morningstar’s insight: Sirtex Takeover Bid at a Significant Premium to Standalone FVE
My insight: Sirtex: A Fantastic Voyage

Viva Industrial Trust (VIT SP) (Mkt Cap: $698mn; Liquidity: $0.9mn)

On the Jan 29, ESR-REIT (EREIT SP) announced a merger proposal for VIT. Such a merger has been well flagged given Jinquan Tong's common holdings in both trusts, and the challenges faced by mid-sized industrial SREITs.

• Pranav estimates a merger ratio should be in the 1.30 - 1.70 range, applying various methodologies, compared to the implied ratio 1.60 where VIT and EREIT currently trade.

• Jinquan Tong holds 18.4% in EREIT and 43.1% in VIT. Guidance is being sought from the SIC and MAS, however, preliminary indications suggest he would not need to abstain at EREIT’s simple majority vote and VIT’s scheme vote.

• With a wide merger ratio range, Pranav would wait for a firm merger announcement before positioning. If a view had to be taken, he would be long EREIT over VIT.

(link to Pranav’s insight: Viva Industrial Trust/ESR-REIT: Consolidation Begins)

Gintech Energy Corp (3514 TT; "Gintech")(Mkt Cap: $311mn; Liquidity: $2.2mn)

On the Jan 29, Gintech Energy Corp (3514 TT; "Gintech"), Solartech Energy Corp (3561 TT; "Solartech") and Neo Solar Power Corp (3576 TT; "NSP") announced that their respective Boards had signed off on a merger agreement, with terms substantially identical to that announced in October 2017, which was covered in Gintech, Solartech and Neo Solar Power: Taiwanese Solar Troika.

• The conditions are not onerous. No single shareholder in any of the companies can single-handedly block the transaction, and Solartech and Gintech shareholders are getting a decent premium; while regulatory approvals should factor in the challenges faced by the industry.

(link to Pranav’s insight: Gintech, Solartech and Neo Solar Power: Merger Agreement Signed)

Very, very briefly in M&A land ...

Tai United Holdings Limited (718 HK) (Mkt Cap: $757mn; Liquidity: $0.9mn)

This takeunder was discussed in last week’s wrap and in Pranav’s insight Tai United: Unconditional Take-Under. On Wednesday shares gained 21% only to fall 11% on Thursday and trade flat on Friday. With a closing print of HK$1.12, it's still ~22% above the offer price. Volume was an estimated ~16% of outstanding float on Tuesday. Odd. Then again, it’s an odd company. CCASS numbers do not shed any light on the trading this week.

Shui On Land Ltd (272 HK) (Mkt Cap: $2.6bn; Liquidity: $8.5mn)

The company released an announcement clarifying media reports Lo Hong Sui, the controlling shareholder, is in "talks with banks for financing and has from time to time been reviewing options with respect to his interest in the Company". Shares popped ~12% (in size) on the news, having gained (also in size) ~7.5% in the prior three days trading. It gave back 6% to close Friday at $2.53/share with a P/B 0.43x vs. a five-year average of 0.4x. The Streets' (7 analysts) fair value is also $2.53.

Changyou.com Ltd (ADS) (CYOU US) (Mkt Cap: $1.6bn; Liquidity: $8.7mn)

The company announced that Charles Zhang, chairman, is reviewing his initial non-binding proposal of $21.05 in cash per Class A or Class B ordinary share, or $42.10 in cash per ADS. The potential revision statement was issued shortly after the company announced disappointing 4Q17 numbers, resulting in an 8.89% decline in the share price. Around 60% of the market cap is in net cash, making an argument that any downward revision should be limited. Shares closed Friday at US$30.33.

Kushikatsu Tanaka Co (3547 JP)(Mkt Cap: $326mn; Liquidity: $27.1mn)

On Friday Jan 26, MOTHERS-listed and fast-growing Osaka-style skewer/grill restaurant chain company Kushikatsu announced it would conduct a tachiaigai bunbai, which will lift the shareholder count by 90, at least. The announcement re-confirms that the goal is to raise awareness and liquidity and shareholder count to list on TSE1, an announcement to which is relatively imminently. Travis believes an inclusion event is likely to be either on the close of March 29, 2018 or April 26, 2018.

• All in, not a great trade and best to stay away. There may be a small air pocket to the upside, but is not expected to be a big one. This is a very high growth, high-priced stock and is unlikely to garner much more coverage from the TSE1 move.
• It is very difficult to short because of significant retail punter involvement. If there is borrow, guard it and you might use it to sell into the TOPIX inclusion.

(link to Travis’ insight: Going into TOPIX - Don’t Get Skewered)

B Lot Co Ltd (3452 JP) (Mkt Cap: $209mn; Liquidity: $2mn)

B Lot announced on the 26 Jan that the company would be reassigned to the TSE's First Section as of February 2, 2018. This triggers an inclusion into the TOPIX Index, which will occur at the close of trading March 29, 2018.

• This is not great trade as Topix inclusions go. Travis estimates the buy is ~25-35% of what is likely real float, but it appears as if a big portion of that trades and is pre-positioned. Plus it's expensive. Stay away. Or be short.

(link to Travis’ insight: B-Lot (3452 JP) TOPIX Inclusion Event)

Tsugami Corp (6101 JP) / Precision Tsugami China Corp (1651 HK)

No matter how I slice it, Tsugami trades rich. Tsugami's bottom line is expected to double in FY18E after doubling in FY17. But Precision makes up ~75+% of Tsugami’s net income & EBITDA yet accounts for only 55% of its market cap. Even applying a similar PER (23x) to that of Precision's for the deconsolidated FY18E stub earnings, equates to a premium to NAV of 20%.

• Interestingly, according to CCASS, 72.29% of Precision’s shares moved into CCASS (into Citibank) on the 20 Dec 2017. This is Tsugami's holding. You don’t need to move shares into CCASS for a general offer or off-market tender. You really only move shares into CCASS to sell in the market or to pledge to a bank/broker.

(link to my insight: StubWorld - Set-Up & Unwind Extremes: Hang Lung, Tsugami)

Hang Lung Group Ltd (10 HK) / Hang Lung Properties Ltd (101 HK)

HLG discount to NAV of 30% looks stretched after bouncing off a one-year low earlier this week. And there are positives in the stub, despite ostensibly being a passive holdco.

• Full-year results indicate received an additional ~ HK$500mn revaluation gain over HLP, boosting the stub value. While a 4Q17 sale of property to HLP at book value, only to apply those proceeds to buy back shares in HLP at 0.7x, is an added bonus.